Default Rate Process

From Open Risk Manual

Definition

Default Rate Process is any stochastic process that aims to model the arrival of default events in a Credit Portfolio

A default rate process is related to the corresponding Credit Loss Process which incorporates additional Loss Given Default considerations

Formula

A default rate process is modelled as the cumulation of individual transitions of Credit Rating into the defaulted state. The individual default indicator for an entity i is simply


\mbox{d}_k^i = 1_{\{ R_k^i = D\}}

where R_k^i is the rating state at observation point k

The default rate process is the sum (defined on a fixed cohort basis) of individual random variables \mbox{d}_k^i


\mbox{DR}_k = \sum_{i=1}^{N} \mbox{d}_k^i


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